Ep. 30 – Comprehensive Estate Planning Guide – Part 2

Welcome to the Good Steward Law and Wealth Podcast, where host Ledly Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.

Welcome back to the Good Steward Law and Wealth Podcast. I'm glad to have everyone here. So we're continuing the series we've been doing, parts of estate plan. We've done part 1, and really it was 1A because we did that in 2 episodes. You know, part 1 talked about What do you do for incapacity? What happens if you're in a coma because you're in an accident or you have dementia or Alzheimer's? How do you prepare for incapacity? How do you pay for care if that happens? You know, especially long-term care. Episodes 1 and 2 of this series, uh, part 1 is incapacity and how you plan for it. And part 2 is what we're going to do today is how do you plan for when you die? How do you avoid probate? That's the main conversation. The moment you pass away, how do we avoid probate is part 2. Part 3 will be how do you live on and plan for your legacy, protect your kids, beneficiaries, whoever after you're gone. So what we will do today is, like I said, Part 2, talk about how do you avoid probate? And I think to do that first, we really need to talk about what is probate? I start with all my clients. I get this question a lot. You know, dad died. I have a will. Do I have to probate his will? The answer is yes, because to make a will valid, it has to be probated. That leads to the number one misconception in my industry. A will does not avoid probate. Most people think you have a will, your estate's set up, which is not the case. So what is probate? It is the administration of your assets after you're gone, led by the court. There's a set of laws called the probate statutes. Every state has them. Most of them are similar, some with little variances. But say you pass away with no will, no planning, nothing. It's a testate probate. That means we submit everything you own to the court and the judge supervises distributing the assets. They would appoint an executor to administer everything based on the statute to who you want it to go to. And so there's like all kinds of ways to go. You know, if you have, if you're single and have kids, everything goes to your kids. So there's, you know, all kinds of rules based on the statutes. But that's what would happen if you don't have a will. Now, if you do have a will, it is a step above nothing because you get to say where your stuff goes, who's in charge of getting there, and like where you want it to go. That's what a will does. But to make a will valid, you have to submit it to probate court. And the judge will sign off on the will. It's worthless until the judge does that. So every will has to be probated. Once you start that process, you start administering it according to the will. So that's why it's better than nothing because it tells where your stuff will go, but you are still in probate court. So you're probably wondering why is probate so bad? Maybe it's not the worst thing in the world, but it is something that can be avoided and should be avoided. When I do planning, we always set up to avoid probate. So the first thing that I'll say on a probate is the bad thing about it is it's time consuming. That's the number one thing. So as soon as you pass away and you file the will with the court to open the probate, you have to file a notice in the paper saying that you passed away. That starts a 6-month creditor period. This is Arkansas. Some states may have different numbers. The 6-month period is a time for any creditors to come forward saying, hey, you owe me money. They gotta be paid before we can distribute to your estate. So that lasts for 6 months. At a very minimum, it takes 6 months. Now, Before you can even open that, you have to get death certificates. Depending on, you know, the situation of death, it can be as quick as 10 days. And I've seen some take up to a month to get death certificates. Some people say 6 weeks, so it could be a month to 6 weeks even before you can start that 6-month creditor period. Ideally, if you've got an estate done, everything's simple, nobody's arguing, it can be done in about 7 months total. I'd say 8 months because you wait maybe a month before you can open it. You go 6-month creditor period, then you spend a month finalizing it and making the actual distributions. You know, if there's real estate, you gotta file deeds and draft those. You gotta talk with financial advisors or banks, administer, give these accounts here and here. Usually 8 months, but we say about a year is what a lot of 'em last. We've had one that had several heirs and it lasted almost 2 years. It can be a long process. That's number one, why you wanna avoid it. Two, it's tedious. There's a lot of filings, a lot of signings. You gotta get everything notarized. You gotta file things, mail notices. Unless things are waived, you have to mail a notice to beneficiaries or interested parties on anything that's filed. In a court process, there's probably, an easy probate, there's probably 15 filings you have to do. But the more assets, the more things you have, it can get 20, 30, 40 filings. Every time you do that, you have to mail it. To interested parties. So that can be very time-consuming, tedious. Really, I tell people a lot, we do probates all the time. We get paid to do them. Sometimes you get paid good to do them, but they're never enjoyable. People are not happy when they're in it, and the process itself is not meant to be easy and streamlined. So that's the second reason. The third reason is everything's public. This is basic. You can get online on the court records and look up anything filed with the court. So you're gonna know who got what, what they owned and where it went. All your stuff's gonna be public. People are gonna know about it cuz everything's gonna be filed. The final thing is cost. It can be very costly. You have to pay to get death certificates if you want multiple copies and you need multiple copies of your death certificate. But just to open the probate in most counties, I think it is $165 just to open it. Then you have to file the notice in the paper and it's usually around, you know, $50 to $150 just to do that. And then you've gotta mail notices to everyone that's interested, at least the first time. So, I mean, you're looking at $500, $600 just to get it open. The big cost comes in when you're paying executors and attorneys to be there and do the work. You gotta have an attorney to do the probate and the statute allows what attorneys can charge. So, it's a percentage fee based on the assets. I just ballpark 3%, but it's, you know, varies sliding depending on the amount and the number of assets. That can be a lot. Just say, think about what is 3% of a million dollar estate? That's a lot of money. Some people have even more than that. And when you start adding up estate, you gotta add up house, financial accounts, life insurance, all of it. Anything that's in that person's personal name, would go through probate. So it can be very expensive. That's why I try to set up my clients to avoid probate, to avoid the time, the hassle, and the administrative expenses. Like when we do an administrative that's done properly, you should be able to administer a whole estate if it's, you know, outright or in a trust, you know, within a month if it's set up right. The goal is to avoid probate. The rest of this thing's gonna be on, this podcast will be on how do we avoid probate. And that we call those non-probate transfers. How do we set up everything to transfer to whoever we want to leave our stuff to outside of probate? Well, there's a few ways. So there is joint ownership, beneficiary designations, gifting away, or trust. The goal and how you think about it is you don't need to die with anything in your name alone or without a beneficiary. So let's take example joint ownership. You can have this on real estate or bank accounts. Say real estate, husband and wife own a house together. They're both on the deed, jointly owned. Husband dies, it all goes to wife. No probate involved. Same with bank accounts. Husband, wife own a joint account. It goes to the joint survivor of that. And if it's titled right, it doesn't have to be husband, wife. It can be other parties. People add their kids to their bank accounts or on their house deed, and that would avoid probate. Now the most common is beneficiary designation. Some people call this transfer on death, TOD, or payable on death, POD, but you name a beneficiary on your account. This is the most common. This is when I do estate plans, we talk with clients about their beneficiary designations. That's a big part of an estate plan. So think about it very commonly. You have an IRA or a 401(k) at work. You are probably asked to name a beneficiary and you can usually name two levels, say You name your spouse as primary beneficiary. If you died, it all goes to spouse, no probate. Now, and then you name a secondary. So you name your kids as secondary. If you and your wife both passed, it all goes to your kids as the secondary beneficiary. That avoids probate. And you can do that on any account, any financial account, whether it's CDs, money market, bank accounts, life insurance, especially the whole reason you set up a life insurance is to be payable to someone. So you can name a beneficiary. The one thing I see people mostly forgetting is bank accounts. You don't think about putting a beneficiary on your bank account a lot of times. So that's something to look into. Make sure you have a beneficiary on every single account. The second type, well, I mentioned briefly there, joint ownership. The third type is gifting away. If you remember our last episode, when we talked about getting qualified for Medicaid, we talked about gifting assets away. If you gift something during your life, you don't own it anymore, so you don't die with it in your name. Easy as that. Third way is a trust, which we will talk about at the end of this, how you avoid probate. I guess that's the fourth way, trust. Get going fast here, can't count. Let's talk about the best way to do this and how you set it all up. Now, there are risks with joint ownership. So let's say you put your kid on your bank account as a joint owner. The risk in that is it is just as much your kid's account as it is yours. They can write a check, take all the money out at any point. Most people would say, well, I don't think my kid's gonna do that. Well, there's things they can't control, like creditors or divorce. If they are sued, that bank account is open to their creditors. If they get a divorce, that account can be open to their divorce. So there are a lot of risks there. And that same goes with real estate. If you have a partner you own property with, those same risks exist. Joint ownership is not the best way. It's somehow banks got where they'd say, you need to put your kid on the bank account so it won't be stuck in probate. What they should do is say, just name your kid as a beneficiary, and then you have a power of attorney to access it during life, but name your kid as beneficiary. Then there's no asset protection, divorce, creditor risk of them being on your account. So there are risks, but joint ownership is not the best way to avoid probate. Naming a beneficiary would be a lot better. What are the risks with naming a beneficiary? It, it depends on your situation, but if you name a beneficiary, it goes to that person outright. When you die, whoever's on your beneficiary designations, transfer on death to them. It's theirs. They can do what they want to with it. The downside to that is one, maybe they got drug alcohol issues. They're not good with money. They don't need to inherit something outright. Two, it's open to their divorce. Once it's theirs, it could be lost to divorce. Creditors, it's open to their creditors, all that. And the most thing I see is we, you're underage. You may name kids as beneficiaries, but they're under 18. You can't hand them that money, so they don't get it till they're 18. But even at 18, if it's a lot of money, like your entire IRA account, $1 million going to them at 18, it's probably not gonna be managed the best cuz they simply don't have the experience or the maturity to manage it. So there's a good bit of risk with naming a beneficiary on your accounts, and it may or may not be the best method. That's how you avoid probate. You need to name beneficiaries if you know your kids are really well off in the world, they're fine, good with money, happy marriage, name them as the beneficiary. Cheap and easy way to make sure you avoid probate, but may not be the best way for your situation. So the other way to avoid probate is in a trust. Anything owned in a trust stays outside of the court system. The whole purpose of a trust is privacy. It is meant to stay private and transfer outside of any court system or under the eyes of any supervision other than your trustee. I went over a lot of details about a trust and you can go back and listen to the, one of my, you know, first couple episodes that we did was on all the details of trust. But just know that generally everything in a trust avoids probate. Your house, you can deed it to your trust and it avoids probate. Your bank accounts, you can own the bank accounts in the name of a trust, or you can make it payable on death. Same with your retirement accounts. You can make the trust the beneficiary. Then all that avoids probate and passes on to who you want it to go to. The other benefits of a trust, other than just avoiding probate, is it's an organization mechanism. It's one container that owns all your stuff and is managed by the people you name, maybe just one person you name. So when you pass away, they're not left with a mess. They know where everything is. They know how it's titled and they have the power to do what's needed next. Distribution. And management is a big deal with the trust. Basically, you can choose within that trust, whatever restrictions you want to put on there, who you want your stuff to go to, anything you name. I want my car to go here. I want my bank account to go here. Or you can say, I want everything divided equally between my 3 kids. You know, you are in charge of how that happens. And you can get granular on the type of assets, but also you can get really specific on when they can access it and what they can use it for. I always say a trust really, well, first off, everyone, you need a trust if you own a business, if you own several things of real estate, or if your net worth's over a certain level. It depends on the type of assets you have and if you need that organizational mechanism to get everything in one container and under one control. How the trust works is you name a trustee. You say, I'm named as my parents' trustee. When they die, I step in, take title to their assets. Manage it and make distributions according to what it says. Say it's all left to me, I deed it all or cut checks to myself. Maybe there's gifts to other people. I am trustee and I make those gifts. That's how a trust works. Everything's owned by your trust and it avoids probate. A key thing to remember to make this trust actually work is funding the trust. So you have to get your assets in the trust. That means deeding property to the trust, taking the second step on everything. When you set up a will, you just sign the will, you're good to go, you're done. When you set up a trust, you have to sign the trust, but then you have to take step 2 of putting things in the trust. So that's making sure bank accounts are in the trust, like retirement accounts, life insurance, everything. If it's all actually in the trust, it avoids probate. Now that's all we'll hit on as far as what goes into an estate plan. That's how you avoid probate. So it's beneficiary designations or a trust for the most part, joint ownership also, depending on the assets the risk. Now, part 3, which we will talk about next episode, is how do you— once you've avoided probate, you've got the trust, you've got the whatever— how do you set it up to the beneficiaries in a way that protects them and can have a generational impact? So what are all the things you need to think about when you're thinking about legacy, passing things on to kids, grandkids, protecting what you've built, avoiding taxes, the real meat and potatoes of how you protect your descendants. That's what we'll talk about in the next episode. I'm glad you've all been here today because this is the Good Steward Law and Wealth Podcast where we consider everything a gift and it's our job to do the best that we can with that gift. Thank y'all for listening.

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